Embracing the Disruption

December 1, 2008

When Antonio Perez took over as CEO of Eastman Kodak in 2003, it must have been a little like taking the wheel on the bridge of the Titanic. What has happened since is a story that will be told in business schools for many years to come, because Perez did what many felt was impossible — he cleared the iceberg without sinking Kodak. The company has not only avoided collapse, but it is now prospering in the world of digital photography.

Kodak, which used to be called "The Great Yellow Father" because employees remained with the company their entire career, has dramatically changed. Sixty percent of the people at Kodak today weren’t part of the company four years ago. Hayzlett (chief business development officer Jeff Hayzlett) calls the new focus "Kodak 2.0," and explains that within the past four years 70 percent of Kodak’s "traditional business" (i.e., film) has been shifted to digital. This has led to the development of 19 products that now comprise 80 percent of revenue.

Think about that for just a minute. 80 percent of Kodak's current revenue comes from products created within the last four years! Let that sink in, because it reveals what can be done in the face of disruptive innovations.

There are many lessons to learn from the leadership of Perez, but for media companies deep in strategy decay, the most important takeaway is to become a part of the disruption — to be fearless in attacking yourself and even your core business. This is the key reinvention concept missing in media company digital efforts, and especially those of local television.

One of the most common questions I get from media companies involves confusion over using the legacy platform to market multiple web products. Conventional mass marketing wisdom says to use the TV station or newspaper to drive traffic to a single point of entry, usually a portal website. This cannot provide sustainable growth, because no matter how "big" the portal is, it will never be big enough to keep pace with the growth of the Local Web itself. The real problem is that this "one-stop" thinking is exactly the opposite of what's necessary, because the Web is the disruptor, and it's perfectly capable of promoting itself.

The early models of television station websites were mostly created and maintained by ad networks, who made their money through aggregating large audiences for national advertisers. These companies provided ways for local media companies to get their content online and make some cash through convergence advertising packages that used the TV station to drive eyeballs to the Web. In the minds of everybody involved, the TV station was where the real money was, and offering special web promotions was just a way to make extra dollars for broadcast advertising.

The same concept for newspapers is called "bundling," and it's one of the problems leading to the online inventory squeeze being felt by many newspaper companies. If the inventory is given away in the name of newspaper ads, what's left to sell?

No one ever considered that the Web itself was capable of sustaining a business without the "help" of the mothership, and the extent to which this attitude exists today is a key factor in why the disruption continues to advance without traditional media at the helm. Like Kodak, we must be willing to give the disruption its due — to embrace it fully as THE way of doing business downstream.

So the idea that owning a local television station in a market is an online competitive advantage needs to be re-examined, because we're looking at it backwards.

When the question of multiple products comes up — and the marketing person starts talking about how it's better to just point viewers in one direction — I ask this question: what would an internet company do to grow and expand in this market absent a television station? While the truth is it would be an uphill battle, the Web is perfectly capable of providing the growth necessary to sustain an online business. In fact, that growth and business has a lot better chance in the long run. because it has played by the rules of the Web, without the artificial advantage of an outside driver of traffic.

Witness what's happening in the world of neighborhood sites, like Cory Bergman's neighborhood blogs in Seattle, hyperlocal sites, like Lisa Williams' h2otown.com, and online-only newspaper sites like The Batavian and Bluffton Today. There are untold thousands of others, each competing with the portals of the traditional media companies and using the method of serving the information needs of a niche audience to draw the eyeballs that advertisers seek.

The Batavian is "published" by Howard Owens, director of digital publishing for a northeast media company. Widely regarded in the newspaper industry as one of its most astute observers and digital innovators, Owens launched the site on May 1, 2008 using the open source software Drupal for content management. It's delivered in a basic blog format and is the first local, online-only news source for Batavia and Genesee County in New York.

"The Batavian began as an internal discussion," Owens wrote in an email, "about what we might try online in the local news space without involving directly a newspaper. It was kind of an evolutionary process of discussing and thinking through ideas before we decided to go the direction we did."

"A good many local newspapers now get 8, 10 even 15 percent of their revenue from online now. And the criticism of this gross amount of revenue is that it isn't enough to sustain a typical daily newsroom. There is also an assumption that because most of this revenue is derived from up sells, that you can only get to that amount when attached to a newspaper. We decided to turn both of those ideas on their head. What if we could achieve nearly the same amount of revenue without a newspaper? Then, what sort of news operation could that amount of revenue support. The experiment here, if you want to call it an experiment, is that we first build the news operation we believe the local market can support, get the audience, then try to fund it to the levels we believe achievable."

Without revealing numbers, Owens says he's happy with the results so far, although he plans advertising modifications to do better. The Batavian is an interesting concept on many levels, not the least of which is it doesn't have to deal with the reticence of traditional newspaper sales account executives to sell against themselves with their online products.

Note especially Owens' reference to the "up sells" dilemma of newspapers. This is exactly the problem with the convergence advertising packages that came from the old ad network model for TV websites in the 1990s. As long as media companies continue to use the Web to create legacy advertising packages, they will undervalue their web properties. And while local stations are busy stunting with convergence, the ad networks are making money from the traffic driven to those sites by the very nature of the convergence deals. This is good for the ad networks, but its value to local media companies is problematic.

Mike Orren has been running Dallas-based hyperlocal site Pegasus News for several years and has mixed feelings about going it alone or being a part of an incumbent media company's brand. "The upside to going solo," he wrote in an email, "is that you don't have all the baggage of the incumbent operation: Fear of user-gen content in the same environment with professional; resistance to linkouts; aversion to YouTube and Flickr as content; and the conversational tone and community ethos that I've yet to see a traditional outfit pull off successfully."

The advantage of being with a known brand, Orren notes, is in sales. "It took us a year and a half to get over the 'who are you' problem," he wrote. This extends the sales cycle for Pegasus, but he still believes the advantage of being able to use all of the tools available in the online media space is worth the extra sales effort. "Traditional media (YP, TV, radio, newspaper) have the feet on the street to do it," he added, "but first, they'll need to lose some baggage before a pure-play like us with deeper engagement and harder-won relationships beats them to it."

Operating an incumbent media business in the same community with local web initiatives will always be a competitive advantage, as long as the legacy platform can be used to market the web properties. But there are bigger advantages to consider. One, the web products can use the legacy platform for "reverse" bundling or convergence, where air time or print ads are used to add value to online advertising. This may be the biggest value of operating an incumbent local media brand struggling to boost its online budget, and in a down time of mainstream advertising, the inventory is certainly there. Two, the Web can be used to boost "traffic" to the legacy platform, and this the opposite of what most marketers see. Rather than building something to extend the brand of our legacy businesses, perhaps we should be thinking of building things that will enhance that brand from the bottom up.

If the Web is growing, then it should be our primary focus, using everything we have at our disposal to reach revenue levels that will sustain both. Moreover, if we only use the legacy platform to drive traffic to the Web, that effort is limited to the reach of the legacy platform. In the TV business, this is especially foolish, for the eyeballs in the community are split four and sometimes more ways in following the "favorite" stations of viewers. Competing on the Local Web can reach much larger shares of the community, which is another reason not to limit our web efforts to only a single point of contact.

We simply must remember that our competition online is not the other legacy media outlets in town, no matter how hard third-party ad networks try and force it to be otherwise. Third-party ad networks make their money by providing reach for their clients using as few outlets as possible. It's more cost-effective for their business to handle national clients this way. They could care less about the structure of the Local Web and the enabling of commerce therein, and the extent to which we've allowed ourselves to serve them and not the local advertising community is the shame of local media companies everywhere.

We're in a fight for our lives, and we'd be foolish to reject any revenue we can obtain, but we must start thinking strategically about the nature of the Web and what's really taking place around us. Reach Local, for example, is a company using non-legacy media web advertising tools to assist local businesses in reaching customers. The company resells Google AdSense ads, among other tools, and teaches local advertisers the value of how the Web works. The Newspaper Next project is now suggesting that local newspapers provide the same kind of service, becoming ad brokers for local advertisers. This may be a case of too little, too late, because Reach Local is well-established and growing every day, but the idea is certainly worth exploring.

Traditional media has a history of waiting for innovations from others and then copying them for success. We're happy to "lift" an idea from another community and make it our own, but this habit is deadly in the online world. That's because the innovations are coming from outsiders with their hands in our formerly stuffed pockets. They're omnipresent, and they have no intention of succumbing to our vaunted brands. To the users of the Web, MySpace, Facebook and thousands of others are local sites. They don't have to be geographically-based to have a geographical influence, and those hip to the ways of the Web know this, including a growing number of local advertisers.

Kodak embraced the disruption that was decimating its film business. The company is riding the disruption into the future by never looking back at the "good old days." It did not come without real pain, however, for reinvention has no respect for those who fight or otherwise refuse the future it offers, nor does it — or can it — concern itself with the unfortunate souls who are, through no fault of their own, caught in its need to save the many at the expense of the few. Note that 60 percent of Kodak's workforce wasn't there four years ago.

It's like that when customers demand something other than what they've been getting.